Over the past decade, the student loan market has experienced significant growth. As of today, the combined total for outstanding federal and private student loan debt now exceeds $1.4 trillion, with the majority of this being composed of federal loans. The Department of Education estimates that more than 8 million federal student loan borrowers have gone at least one year without making a required monthly payment and have fallen into default. Nearly 1.2 million borrowers defaulted in the past year.

Concerns for Student Loan Borrowers Arise

On May 16, 2017 the Consumer Financial Protection Bureau (“CFPB”) released an analysis of the student loan industry data. The CFPB’s analysis indicates that 9 out of 10 of the highest-risk borrowers were not enrolled in federal affordable repayment plans. Highest-risk borrowers are those who previously defaulted on a federal student loan, exited default, and were then transferred to a student loan servicer. The CFPB’s analysis reviewed thousands of the highest-risk borrowers who are exiting default and may be eligible for affordable repayment options.

What is so troubling about this analysis is that it is the obligation of the student loan company to inform borrowers about affordable repayment options. It is abundantly clear that borrowers are not receiving adequate notice/information/education about repayment options. “For far too many student loan borrowers, the dream of a fresh start turns into a nightmare of default and deeper debt,” said CFPB Student Loan Ombudsman Seth Frotman.

Student Loan Rehabilitation & Consolidation

There are programs in place for federal student loan borrowers intended to provide borrowers a fresh start. There are generally two options available:

Rehabilitation: borrowers can work with a debt collector to “rehabilitate” their defaulted debt. In this process a borrower must make nine on-time payments over 10 months to exit default. After making the requisite payments, the borrowers must work with the student loan servicer to obtain an affordable repayment plan.

Consolidation: borrowers can refinance the defaulted debt by consolidating it into a new federal Direct Consolidation loan, which immediately moves them into an affordable repayment plan. This is the most prevalent option utilized by student loan collectors in order to get borrowers out of default.

The Facts About Student Loan Servicers

In 2016 the CFPB sent out a survey to student loan servicers regarding how previously defaulted borrowers performed over time. The survey included information on approximately 600,000 of the highest-risk student loan borrowers. Below are key observations that were obtained regarding highest-risk borrowers as a result of the survey:

95 percent of the highest-risk borrowers do not redefault within the first year when they consolidate into an affordable repayment plan: A minority of the highest-risk borrowers consolidate their defaulted loans to get out of default, a process that will automatically establish payment plans based on their income. Nearly 95% of borrowers who recently consolidated their defaulted loans remained on track one year later.

Approximately 50% of highest-risk borrowers redefault if not enrolled in an affordable repayment plan: Evidence indicates that income-driven repayments are a key step to avoid default for many of the highest-risk student loan borrowers. Data reflects that approximately 50% of all borrowers who were not enrolled in an income-driven plan ended up back in default within three years.

9 out of 10 of the highest-risk borrowers were not enrolled in an affordable repayment plan after rehabilitation: The majority of highest-risk borrowers are put into the rehabilitation program, which means that they must pay a debt collector for nine out of ten months in order to get out of default. Once out of default, these borrowers must work with a student loan servicer to secure an affordable repayment plan. The range of widely available income-driven repayment plans that allow borrowers to pay based on income should ensure that payments remain affordable over time. However, these programs are not always readily accessible to borrowers.

Borrowers were five times more likely to default for a second time if they did not enroll in an income-based repayment plan.

What is so disturbing about these observations is that borrowers that work hard to get out of default are not being adequately informed regarding repayment options and then end up in default again. Borrowers are not being put into income based repayment plans not for lack of trying. Borrowers are consistently indicating that the communication, processing of paperwork, and customer service breakdowns at many stages in the process.

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